SANTA ANA, CA—Millennials increasingly are looking to homeownership; however, First American Financial Corp. sees a dilemma: a supply-demand imbalance in the housing market. Strong demand is outpacing supply, as the lack of inventory continues to prevent the market from reaching full potential,” says Mark Fleming, chief economist at First American Financial.

Fleming notes that the low inventory of homes for sale—the National Association of Realtors puts it at 9% lower than a year ago—is preventing the housing market from reaching its potential and pressuring prices higher. “Increasing shortages of homes for sale are a growing problem for potential home buyers, especially potential first-time home buyers today, as it causes affordability to decline,” he says.

As more and more Millennials marry and have children, among the strongest determinants for the desire to be a homeowner, “demand for housing will remain robust,” says Fleming. “However, the housing market faces a dilemma that is restricting the inventory of homes for sale. As rates rise and the cost to finance a mortgage increases, existing homeowners are prisoners in their own homes. In addition, the fear of being unable to find a home to purchase hinders homeowners' decision to sell.”

First American says potential existing-home sales increased to a seasonally adjusted, annualized rate of 5.72 million in May, a month-over-month increase of 1.8%. This represents a 90.3% increase from the market potential low point that was reached in December 2008, after the capital markets collapse three months earlier.

At the same time, the market potential for existing-home sales fell in May by 1.1% compared with a year ago, a decline of 62,000 SAAR sales. Currently, potential existing-home sales are at an SAAR of 644,000, or 11.2% below the pre-recession peak of market potential that occurred in July 2005. They're underperforming their market potential by 3.8% or an estimated 218,000 sales.

In response to the tight supply, house prices rose 5.8% Y-O-Y in May, “the fastest pace since July 2014,” Fleming says. “When combined with higher interest rates, the net effect is an 11.0% Y-O-Y decrease in affordability, according to the First American Real House Price Index.” He adds, though, “With wage growth at 2.5% over the past 12 months, and unemployment at its lowest level since May 2001, economic conditions that favor Millennial household formation will continue to drive strong demand, despite decreasing affordability.”

Instant Insights /

Robust Demand Meets Low Housing Supply

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